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Crude Oil at Major Inflection Point as USDOLLAR Breaks Down

Crude Oil at Major Inflection Point as USDOLLAR Breaks Down

2016-04-12 11:29:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Talking Points:

- Crude Oil (CFD: USOIL) challenging its 200-DMA again; flag points towards $51.00/brl.

- USD/CAD nears significant support around C$1.2830.

- As market volatility rises, it's a good time to review risk management principles.

With the USDOLLAR Index's breakdown gathering pace, a number of other widely watched instruments are exhibiting behavior indicative of a potential broad turning point in global markets. A stable Japanese Yen and softer US Dollar have given renewed vigor to the commodity bloc; and it seems that further gains in the space are contingent upon more stability in the Japanese Yen and weakness in the US Dollar.

Whereas Gold (CFD: XAU/USD) and Silver have been exhibiting signs of developing longer-term bottoms, today Crude Oil comes into focus as it nears a major inflection point: its 200-DMA (now at $40.62/brl). Crude Oil has tested its 200-DMA three times since the breakdown in July 2014, back in June and October 2015, and again in March 2016 (chart below).

Chart 1: Crude Oil Daily Chart (July 2015 to April 2016)

Crude Oil at Major Inflection Point as USDOLLAR Breaks Down

If Crude Oil is able to clear its 200-DMA this week, we'd have the most significant piece of technical evidence to date that an important short-term low has been established. Concurrently, as explained in the above video, the measured move for the recent flag that may be forming below the 200-DMA, if validated, would call for an extended run towards $51.00/brl. That would certainly fly in the face of conventional wisdom.

Chart 2: USD/CAD Daily Chart (August 2015 to April 2016)

Crude Oil at Major Inflection Point as USDOLLAR Breaks Down

For USD/CAD (chart above), which has been enjoying the ride with Crude Oil, it seems too coincidental that Crude Oil is at major resistance while the pair itself sits at recent swing lows near C$1.2830 (established in October 2015 and March 2016). While the Canadian Dollar has been strong in its own right, it seems that it may need a further push here.

Considering that the recent breakdown in the USDOLLAR Index has gone hand-in-hand with the Crude Oil rally, it's not a stretch to suggest that a legitimate USD/CAD breakdown through C$1.2830 is contingent upon Crude Oil clearing its 200-DMA.

See the above video for trade implications and technical considerations in SPX500, USD/CAD, GBP/USD, Crude Oil, EUR/USD, Gold, Silver, and the USDOLLAR Index.

Read more: USDOLLAR Back to Support as Gold, Global Equities Try to Rally

If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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